TAIPEI (S&P Global Ratings) July 13, 2017-- S&P Global Ratings today said it had affirmed its issuer credit ratings on Taiwan-based China Development Financial Holding Corp. (CDFHC), KGI Bank, and KGI Securities Co. Ltd. The outlook on the long-term ratings is stable. At the same time, we affirmed our Greater China regional credit ratings on the entities.

"The rating affirmation reflects our view that CDFHC group's planned offer to acquire a 25.33% stake in Taiwan-based China Life Insurance Co. Ltd. will have minimal impact on the overall CDFHC group credit profile," said S&P Global Ratings credit analyst Serene Hsieh. "This is despite the added insurance component will account for a material portion of the group's consolidated financial statistics if the acquisition materializes. We do not expect the acquisition to materially alter the group's business model."

CDFHC group is a mid-size financial group in Taiwan in terms of total equity. The acquisition will expand the group's business platform into four key prongs--commercial banking, securities, venture capital/private equity, and life insurance. We believe the acquisition will have a slightly positive impact on the group's business diversification and retail franchise; however, this will not be sufficient to drive the group's overall business position to a stronger level. The completion of the acquisition is subject to approval from regulators.

We assess the planned acquisition to be consistent with the group's growth strategies to broaden its business scope in Taiwan in recent years and utilize capital freed up from disposals of direct investments at its venture capital arm. The disposals were made to fulfil the regulatory requirement to keep the group's direct investment exposure below 20% of the group's net worth by the year of 2020.

"The acquisition will have a neutral impact on the group's strong capitalization, despite a likely rise in the group's capital utilization," added Ms Hsieh. "We anticipate the immediate financial impact of the acquisition to be limited."

The total consideration of the acquisition will be about New Taiwan dollar (NT$) 30.8 billion, which will be financed by the holding company's own cash and a moderate level of debt issuance. The tender offer is for a consideration of 880 million common shares at NT$35 per share.

In our view, the group's established franchise in corporate banking, strong capital buffers against potential financial volatilities, and stable and diversified funding and liquidity profile support its business needs and overall group credit profile. CDFHC group's growth appetite is above the average of more established banking groups in Taiwan, which reflects the high growth strategy of CDFHC group's core subsidiaries.

"The stable credit outlook on CDFHC and the broader group reflects our expectation that the group will maintain its adequate business position in Taiwan's highly competitive banking environment over the next two years, said Ms. Hsieh. "This is underpinned by the group's established franchise in local financial markets We also expect CDFHC group to maintain its strong capitalization and implement a prudent capital policy, given the group's plan to broaden its market scope through potential acquisitions in the next two years."

We could lower the long-term rating on CDFHC if its core banking unit KGI Bank or the CDFHC group pursues overly aggressive business expansion through its banking or securities arm without sufficient capital plans resulting in a sharp decline in capitalization. This would be represented by a risk-adjusted capital (RAC) ratio below 10%. In addition, overly aggressive business expansion in China could negatively affect our anchor assessment for the core banking entity. That's because we view China as having higher economic risk than Taiwan. We could also lower the rating if the group fails to establish a stable retail banking business with satisfactory quality.

We could upgrade CDFHC if the group's credit profile materially improves as a result of material improvement in KGI Bank's business position. This would have to be accompanied by the group's superior operating performance compared with its domestic peers' and stable credit profiles at its core units or significant improvement of KGI Bank's risk management capacity to demonstrate above-average loss experience. However, we consider both upside scenarios as remote over the next two years.

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